No sin in taking losses

Commentary: Lesson learned from Kirk Kerkorian

By

DavidNassar

Editor's note: David Nassar is chairman and chief executive of MarketWise.com.

BOULDER, Colo. (MarketWatch) -- Taking losses is a tough part of doing business on Wall Street and no one is immune to making mistakes. In fact, professionals know that the sin isn't in taking a loss, but rather not taking a loss and letting a loser continue to eat away at the equity in a portfolio.

Losers not dealt with are like a cancer which can quickly spread throughout the body if it is left untreated. Tuesday it was reported that billionaire Kirk Kerkorian sold 12 million shares of General Motors
GM, +3.40%
between Dec. 15 and Dec. 19, reducing his stake in the auto maker to 7.8% (about 44 million shares) of the total outstanding shares.

According to filings with the Securities and Exchange Commission regarding purchase and sales, the approximate loss on the sale of those shares amounted to $120 million. Tracinda Corp., Kerkorian's company, stated the reason for selling the shares of GM and realizing the huge loss was a tax strategy which allowed them to end the year with a capital loss after offsetting capital gains on unrelated transactions.

Whatever the reason for the sale, taking a loss of $120 million hurts no matter who you are. Speculation is running rampant as to the "real reason" he may have sold; is he losing faith in a turnaround at GM? If he is concerned that GM will not be able to pull off a recovery and the company eventually declares bankruptcy then taking a $120 million loss is a wise decision.

If he is still convinced of a turnaround and tax reasons were the motivation behind the sale then it will make sense to watch the stock closely as the thirty day "wash sale" rule approaches expiration for this transaction. The wash sale rule prevents a loss on a sale of stock to be claimed on your taxes if you buy replacement stock within the wash sale period, which is 30 days. In other words, if Kerkorian wants to recognize a loss for tax purposes he is forbidden from repurchasing the shares on which he claimed a loss for 30 days.

We can only speculate as to the true intent of Mr. Kerkorian, but it will be very interesting to see if he does reemerge as a buyer of General Motors in 30 days. If he remains committed to his investment, there could be a very interesting trade setting up in GM towards the middle of January.

Meanwhile, we can look at the GM transaction and apply it to our own trading and tax situation. Two weeks ago I outlined a case for buying shares of Orasure
OSUR, -1.46%(See story)

In that article I noted it was the sales of their HIV test product which was the primary driver of sales and earnings growth for the company. The day after that article, OSUR reported that some of the HIV tests they sold were giving false positive results. The effect was devastating for shareholders as the stock lost nearly half of its value over the next two weeks.

Fortunately, the stock did not experience a big initial gap lower which gave our stop a chance to be executed before the major damage was done. The stock did trade quickly lower and my suggested stop of $12.30 was hit that day for a loss of approximately $1.20/ share or about 8.8%. Certainly a quick loss of this magnitude stings, but the use of a stop loss was the prudent decision as the stock has seen a low of $7.74 (a loss of 42.6%) since the stop was triggered. Again, no one likes to take losses, but the market is dynamic and we must respond to news as it affects our holdings. That is the reason for always having a stop.

As an example of how the sale of a losing stock could reduce a traders tax burden at year end, we can use the OSUR loss and match it up with the Syneron Medical
ELOS, +3.75%
trade which was stopped out with a nice gain last week.

Assuming you were to commit $25,000 each to the OSUR and ELOS trades, you would have purchased 1850 shares of OSUR at $13.50 and 660 shares of ELSO at $37.50. On the OSUR transaction you would have lost $1.20/ share for a total loss of $2,220. For ELOS the gain per share was $4.95, or a total profit of $3,267. Net on the two transactions would have been a reportable capital gain of $1,047.

While this is a simple example involving two short term trades, now is the time for reviewing your portfolio with your broker or tax advisor to implement your yearend tax strategies..

As for the market, I expect quiet overall trading through the end of the year with the best level of support for the Standard & Poor's 500 Index
SPX, +0.59%
remaining at 1245, while the Nasdaq 100
NDX, +0.76%
should now be well supported near the rising 50 day moving average which is found near 1640. Happy Holidays!

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